Alamo Group Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. The quarter includes Specialized Industries results from its May 13 acquisition.
Financial performance
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales | $233.2 | $174.7 | $610.8 | $511.2 |
| Gross profit / margin | $55.4 / 23.8% | $43.2 / 24.7% | $140.9 / 23.1% | $122.2 / 23.9% |
| Operating income / margin | $21.5 / 9.2% | $15.3 / 8.8% | $47.0 / 7.7% | $42.6 / 8.3% |
| Net income | $13.4 | $11.3 | $29.8 | $30.1 |
| Diluted EPS | $1.10 | $0.93 | $2.43 | $2.47 |
| Operating cash flow | Not separately stated | Not separately stated | $24.4 | $17.0 |
| Capital expenditures | Not separately stated | Not separately stated | $6.7 | $9.9 |
- Q3 sales rose 33.4%, primarily from acquisitions, with additional improvement in Industrial and European equipment sales. Q3 net income increased 18.0%.
- Nine-month sales rose 19.5%, but net income declined about 0.9% and diluted EPS fell from $2.47 to $2.43. Agricultural weakness, lower gross margin percentage, higher interest expense and a higher effective tax rate offset sales growth.
- By segment, Q3 sales were Industrial $126.0 million, Agricultural $57.7 million and European $49.6 million. Nine-month operating income was Industrial $28.6 million, Agricultural $9.4 million and European $8.9 million.
- Cash and cash equivalents were $38.6 million at September 30, versus $64.0 million at December 31, 2013. Working capital was $296.3 million, up $40.0 million, mainly because of acquisitions. Nine-month operating cash flow was $24.4 million.
- Total debt was $190.9 million, including $190.0 million drawn on the revolver, compared with $0.4 million at year-end 2013. The $250 million facility had $59.3 million available after letters of credit; it matures May 12, 2019. The company reported compliance with its covenants.
Material changes and notable items
- Alamo acquired Specialized Industries’ operating units for approximately $193 million, financed with about $190 million of new revolver borrowings. Specialized contributed approximately $61.1 million of sales and $4.1 million of net income from closing through September 30. Two smaller acquisitions, Kellands and Fieldquip, had combined consideration of $6.2 million.
- Acquisition accounting remained preliminary. The acquisitions added $41.4 million of goodwill; acquired intangible assets were $57.5 million at preliminary fair value. Management expected to finalize purchase accounting within one year. Q3 included $1.1 million of inventory fair-value step-up costs; nine-month acquisition costs were $1.8 million.
- Alamo repurchased and retired 849,690 shares from Capital Southwest for $34.2 million, funded with revolver borrowings. The repurchase price was $40.255 per share.
- Q3 foreign-currency translation loss was $11.2 million; the nine-month loss was $8.5 million. This reduced stockholders’ equity and contributed to comprehensive income being $2.3 million in Q3 despite $13.4 million net income.
- Management attributed lower gross margin percentages partly to reduced Agricultural production and lower absorption, as well as acquisition inventory step-up costs. Interest expense increased with acquisition-related borrowing. The nine-month effective tax rate was 34.3%, compared with 30.1%, partly because 2014 R&D credits had not been approved and Specialized operated in higher-tax jurisdictions.
Outlook, risks and contingencies
- Management described markets for the remainder of 2014 as expected to be steady, but gave no quantified earnings or revenue guidance. Backlog increased 47% to $162 million year over year, or 3% excluding acquisitions; gains came from Industrial and European businesses, while Agricultural new orders weakened.
- Management cited soft agricultural conditions tied to lower commodity prices and higher farm input costs, as well as prolonged winter weather earlier in 2014. It also noted continued European economic uncertainty and a weak French market.
- Risks include economic and credit conditions, commodity prices and farm income, government budgets and regulation, weather, raw-material and energy costs, foreign exchange and interest rates, competition, litigation, and the ability to integrate acquisitions. Management said operating cash generation and credit facilities should meet foreseeable cash needs, while acknowledging uncertainty around credit availability.
- Goodwill was $72.0 million. No impairment was recorded in the first nine months of 2014, but management identified the Schwarze and Rivard reporting units as more sensitive to valuation assumptions and warned that deteriorating conditions or changed assumptions could lead to future impairment.
- Environmental matters include monitoring at the Indianola, Iowa site and remediation at Bush Hog’s Selma, Alabama property. In litigation, the Fifth Circuit overturned a $1.0 million jury judgment against Gradall in September 2014; the plaintiff could still seek U.S. Supreme Court review. Deere appealed a separate patent case in which the jury found no infringement and the patent invalid.
Important facts for investors to verify
- Final purchase-price allocations, integration costs and the acquired businesses’ continuing contribution to sales, margins and cash flow.
- Whether Agricultural demand and dealer inventories stabilize, and whether the reported backlog converts to revenue as expected.
- Revolver utilization, covenant headroom, variable-rate exposure and the availability of the remaining credit capacity.
- Goodwill impairment sensitivity, particularly for Schwarze and Rivard, and the effect of currency movements on earnings and equity.
- Updates to environmental monitoring, litigation outcomes and any related reserves or cash obligations.